How the 2008 crisis reshaped used cars

By Dave Guilford

On Sept. 15, 2008, Ford dealer Marc Cross was preparing to tour the New York Stock Exchange when he heard that Lehman Bros. had collapsed.

"We were literally sitting there on Wall Street outside the stock exchange waiting and seeing all this hullabaloo," recalls Cross, owner of Jordan Ford in San Antonio. "They told us that Lehman had collapsed. It was kind of surreal."

Cross' group of dealers immediately feared for the auto industry: "A lot of things run through your head. Is this another 1929?"

It was easy to see that a spreading economic panic would spook car shoppers, dry up credit and send new-car sales into a swoon. But the new-car sales collapse would have a domino effect, and the hangover is being felt acutely now by car dealers:

• When drivers keep cars longer rather than trading them in -- and when a new-car sales slump decimates the pool of potential trade-ins -- dealers must pay top dollar for used-car inventory, and the shortage hammers vital used-vehicle profits.

In a dozen ways, aftershocks from the new-car sales debacle are reshaping the used-car business.

Dealers are keeping older vehicles on their lots now, rather than sending them to auctions. They're spending more time and effort to find the right used cars to sell. And they will have to work even harder to protect a key source of profits.

This snowball effect is just going to get worse as first 24-month cars, then 30-month cars, then 36-month, then 40-month cars don't come back as trades-ins -- because they were never built and bought in the first place.

Asbury Automotive COO Michael Kearney says most buyers trade in vehicles at about 40 months. So the shortage of used vehicles will worsen as the post-Lehman sales crash ages, he says. "A year from now, or perhaps two years from now, this will be a much more important question than it is today," Kearney says.

Some segments give a preview of the future. After gasoline prices rose in the spring of 2008, truck sales plummeted, and manufacturers cut back on light-truck production. Two-year-old pickups and SUVs are in short supply.

Similarly, rental car companies -- usually a steady source of lightly used cars -- began postponing new-car buys in 2009. Although sales have revived in recent months, Ford spokesman Steve Kinkade says rental companies still are turning the fleet over less frequently than in past years.

"Typically, rental fleets hold on to vehicles for six months and then put them into auction," Kinkade says. "But with the bad economy, they're holding on to them longer."

Pain in Maine

John Isaacson, CEO of Lee Auto Malls, a dealership group in Auburn, Maine, says his used-car buyers see fewer recent off-lease cars at auction, particularly Chrysler and General Motors models. As the credit crunch started to bite in 2008, GM and Chrysler started scaling back leasing operations sharply. Chrysler Financial withdrew from leasing altogether in August 2008.

"It is definitely harder to get used cars. You have to pay more at the door and pay more at the auction," Isaacson says. "We've been willing to do that. We've been able to keep the supply where we want it to be."

Sales of certified used vehicles fell last year, dropping 10 percent to 1.53 million. But some automakers say their certified-used business is healthy. For example, Kenn Sparks, manager of business communications at BMW North America, said BMW has a good volume of off-lease vehicles, although it its supplementing them by moving trade-ins into certified-used.

"Right now the CPO business is largely unaffected, although there are signs of an increasing tendency to purchase a slightly cheaper non-CPO vehicle," Sparks wrote in an e-mail. "It remains to be seen how a reduction in off-lease maturities in 2011 will affect CPO sales."

Scouring the auctions

But dealers for other brands say they are hustling to find used cars and are instituting practices to raise used-car revenues. The selection at used-vehicle auctions troubles many dealers -- although auction houses themselves are doing fine despite a reduction in unit volume.

Doug Wolford, a used-car buyer at Neil Huffman Nissan in Louisville, Ky., says he is seeing more used 2007 models at auctions than 2008s. On a recent Friday, he says, he bid on 140 vehicles at an auction but bought only 14 because the prices were so high.

He was interested in a 2007 Nissan Murano SL all-wheel-drive crossover with fewer than 40,000 miles. He passed when the auction price went to $19,500.

Wolford says that after adding a $400 auction fee, $300 for transport, $145 for an inspection and $700 to $800 to prepare the vehicle for retail sale, he would have had more money in the vehicle than the $21,000 retail price listed in used-car price guides. He says he bid on 30 Muranos but "didn't buy one."

"I normally sell 200 used vehicles a month," Jones says. "Lately it's been hard to find that many. There are weeks when my man goes to auction to buy inventory and comes home with just two or three vehicles. It's a huge problem."

Jones recently traded for a 2004 Buick Century with 70,000 miles. The dealership paid $6,000 for it, installed new brakes and tires and made a few minor changes and is now asking $8,500 for it.

Says Jones: "Three years ago, that would've been a $2,500 car."

Fewer late models

Tom Webb, chief economist at Manheim, says fewer used 2008 and 2009 models are available than in peak sales years. And there will be fewer 2010 models, too, if the new-car industry sells 11.5 million units in 2010 as predicted, he says.

From 2008 through 2010, the industry will have sold about 35.2 million new vehicles, Webb says. That's well below the peak sales years of 1999 through 2001, when the new-car industry sold 51.5 million units. That's 16.3 million fewer units that will be recycled as used vehicles.

Dealers are more likely now to keep, rather than wholesale, older, higher-mileage vehicles they take in trade. Marion Luna Brem, owner of Love Chrysler-Dodge-Jeep in Alice, Texas, says customers have been taking better care of their cars, which means that many of the older vehicles coming in as trades are of high quality.

Brem says the used-car business has picked up so much that she is opening a used-car store in Corpus Christi.

Trade-in team

Michael Maroone, COO of AutoNation Inc., says that as consumers have deferred purchases, they put more miles on their existing vehicles: "In addition to the scarcity of used cars, the mileage on cars has really gone up."

The old normal was seeking used cars with fewer than 50,000 miles, Maroone says. Today the retailer is looking at vehicles with 70,000 to 80,000 miles.

AutoNation is employing a number of tactics to keep its used-vehicle stocks strong.

"We're trying to retail everything we can," Maroone says. "We're keeping vehicles we once would have wholesaled."

AutoNation uses sophisticated software to evaluate where specific vehicles will sell for the highest price. AutoNation moved 11,000 used vehicles from store to store during the second quarter -- three times more than last year, Maroone says.

For instance, if a customer trades in a Toyota Sequoia at a Chevy dealership, AutoNation might move the Sequoia to a Toyota store in the same market and sell it for a higher price as a certified pre-owned vehicle.

The new methods don't always mean higher margins "because we're stretching for that trade," Maroone says. But he identifies other benefits: higher new-vehicle market share, for instance, and speedier turns of used cars.

"We believe there's an opportunity to turn them in probably half the time if they're in the right place and certainly generate a higher sale price, which can allow us to be more aggressive to win that trade," Maroone says. "That's our answer to the shortage of used cars, to try to make more car deals and win more trades."

Still, AutoNation recognizes the problem ahead as the sales crash that began with the Lehman bankruptcy matures.

"It's an issue today," Maroone says, "and it's going to continue to be an issue at least two years out."

This story was reported by Lindsay Chappell, Donna Harris, Diana T. Kurylko, Jamie LaReau, Mark Rechtin, Arlena Sawyers, Bradford Wernle and Amy Wilson. It was written by Dave Guilford.

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